Thursday, May 24, 2012

“HPQ prints a fairly strong quarter (PC driven, partially offset by declines in printing/Autonomy) on an improvement in margins across PC’s, printing and services. More importantly, management announced a $1.7B restructuring that’s expected to result in $3.0B - $3.5B in cost savings by FY’14 (which will be reinvested into new channels/R&D), and as a result, they raised the outlook on the fiscal year, as they’re now looking for $4.05 - $4.10 in earnings power (vs. $4.00 prior)…”

That’s the summary of Wall Street’s “thinking,” such as it is, about last night’s Hewlett-Packard layoffs call—er, earnings call—and it contains so many remarkable statements you don’t know where to begin.

The “declines in...Autonomy” comment, for example, refers to the first revenue drop at Autonomy in at least 32 quarters—which, considering HP bought Autonomy for $10 billion a mere 6 months ago (telling us, at the time, Autonomy would “accelerate” its “software business momentum”) is no easy feat.

Then there’s the $1.7 billion restructuring “that’s expected to result in $3 - $3.5 billion in cost savings…which will be reinvested in new channels/R&D.” Here’s what HP said about it last night:

“As a result of productivity gains from automation, in addition to streamlining the organization, HP expects to eliminate roughly 9,000 positions over a multi-year period. The combination of these activities will allow HP to reinvest for further growth. Investment areas will include private cloud infrastructures, application services and desktop as a service. You’ll also see other new offerings…”

Oh, wait, that's what HP’s Ann Livermore said in June 2010 about another restructuring that was going to boost margins and business reinvestment...

Here’s what HP actually said about it last night:

“What we announced was that on a long-term basis, we see the savings opportunity to be roughly $1.8 billion on an annual run-rate basis. And this is after we reinvest some of the head count savingings…”

Oh, wait, that’s what HP’s CFO said in September 2008...

You get our drift. It’s like when one “Dear Leader” in North Korea gets replaced with another “Dear Leader” and nobody in North Korea remembers that the old “Dear Leader” promised everything the new “Dear Leader” is promising, mainly because they’re too busy digging for worms for their breakfast to care.

The biggest howler in the HP layoff report, of course, is the new, “higher” earnings power as a result of this latest batch of layoffs.

HP has trained the barking seals on Wall Street to focus strictly on non-GAAP earnings, which, as we have pointed out here before, means—literally—earnings not prepared in accordance with generally accepted accounting principles.

Specifically, by leading off with non-GAAP earnings, HP shows the good stuff—revenue and gross profit, for example—from its many terrible acquisitions (Compaq and EDS, to name two) and excludes the bad stuff, such as amortization and restructuring costs associated with those businesses.

Of course, without the bad stuff—the turnaround costs and the amortization from those acquisitions—HP wouldn’t have the good stuff (revenues and gross profits). Don’t ask us how it gets to report numbers this way, but it does.

In any event, last we checked, the actual GAAP number HP buried in last night’s release was cruising in at a cool $2.25 to $2.30 per share, or almost half the non-GAAP number...and down by one-third from the previous GAAP guidance of $3.20. And in case you are wondering about cash flow, from which all good things business-wise come, HP's second quarter cash flow from operations, according to our Bloomberg, declined almost 40%, from $3.9 billion to $2.5 billion, marking the lowest second fiscal quarter cash from operations since 2005, when revenues were one-third lower.

Only in America! And North Korea, come to think of it…

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

The content contained in this blog represents only the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. And if you think Mr. Matthews is kidding about that, he is not. The content herein is intended solely for the entertainment of the reader, and the author.

Tuesday, May 22, 2012

A friend called up today about the Facebook “Face-plant” hysteria: he wanted to know why everybody was looking for somebody to blame.

“They wanna blame the underwriters, they wanna blame the analysts, they wanna blame NASDAQ, they wanna blame the insiders. But how about they look in the mirror?” he said. “Nobody put a gun to their heads and told ‘em they had to buy it.”

And he’s right.

In fact, there was plenty about Facebook to make a sober investor take pause even before it became a badge of honor to tell the Wall Street Journal you were going to load up on the stock, as so many investors did.

Check out, for example, the following sequence of quarterly revenue growth starting in March 2011 and ending in March 2012:

111.88%, 107.18%, 104.28%, 54.72%, 44.73%.

Now ask yourself, “Is this a company I want to buy at any price?

Well, that’s the annual growth rate in Facebook’s quarterly revenues, straight off our Bloomberg. Not exactly “up and to the right” as they say on Wall Street.

Here’s another set of numbers—also publicly available—that might have flashed an even bigger yellow warning sign for a prospective Facebook IPO flipper:

140.66%, 114.56%, 79.77%, 58.99%, 32.15%.

That’s the growth in quarterly revenues from last March to this March, also straight off our Bloomberg, for Zynga.

Zynga, as most Facebook fans know, is the equivalent of a hotdog vendor in Yankee Stadium: the only place it sells its stuff is on Facebook. If you follow how the hot-dog vendor is doing on any given day, you have a pretty good idea how full Yankee Stadium is.

So you would think anybody buying Facebook would have looked at not only Facebook’s revenue progression, but Zynga’s as well.

And given those trends, you’d think anybody buying Facebook would have paid attention to the other warning signs, like GM pulling its ads off Facebook the week before the IPO; like the underwriters ramping up not only the deal price but the deal size; like CNBC devoting the entire day of the IPO to Facebook—that sort of thing.

And of course you’d be wrong.

People wanted to buy Facebook, no matter what.

And those people can blame the underwriters or the analysts or NASDAQ or the insiders all they want.

But as my friend said, “Nobody put a gun to their heads.”

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

The content contained in this blog represents only the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. And if you think Mr. Matthews is kidding about that, he is not. The content herein is intended solely for the entertainment of the reader, and the author.

Monday, May 14, 2012

Poor Scott Thompson.The world’s (currently) most famous accused-resume-inflator is gone from the C-Suite at Yahoo.

Oh, and he has thyroid cancer to boot.

Meanwhile, Wall Street’s Finest are gearing up for next week’s earnings from Hewlett-Packard, and based on our perusals of various so-called research reports—not to mention a puff-piece on the company in this week’s Barron’s—all signs point to an “in-line” quarter from HP, although one analyst is suggesting “yet another restructuring plan/charge of about $1billion.”

[Editor's Note: Tuesday morning, another of Wall Street's Finest came forth with an expected non-recurring-recurring-like-clockwork restructuring charge as high as $2 billion for HP. Let the Palo Alto "non-GAAP" earnings games begin!]

[This just in on Thursday afternoon: news is breaking that HP will lay off as many as 25,000 workers. In the perverse logic of one Wall Streeter, this "would enable investments in strategic, higher growth areas," as if HP has not been able to make those investments with its $3 billion R&D budget (perhaps the $10 billion share buy-back authorization has something to do with it). Faulty logic aside, expect earnings estimates to start being ratcheted upwards... ]

Now, we have, more than once, commented on the low quality of HP’s reported earnings. You can read about it here and here, if you like.

Suffice it to say, HP does what portfolio managers can only dream of getting away with: it reports “non-GAAP” earnings that include the good stuff from acquired companies (revenue and gross profit, for example) and excludes the bad stuff from those same companies (amortization and restructuring charges, for example), which serves to a) point out what silly prices HP pays for acquisitions in the first place and b) explain how such a theoretically profitable enterprise as HP came to possess a tangible book value of minus $7.84 per share, according to my Bloomberg. (Yes, that's negative, not positive, $7.84.)

Nevertheless, Wall Street’s Finest dutifully record those “non-GAAP” earnings from HP and set their clocks by them.

Imagine if portfolio managers tried to report “non-GAAP” investment returns, booking only their winners. Or if baseball players tried to report “non-GAAP” batting averages.Or, most relevant of all, if Jamie Dimon had tried to call that $2 billion trading loss from his London Whale a “non-recurring” loss... Hey, HP does that stuff every year, and for some reason, Wall Street’s Finest buy HP’s “non-GAAP” earnings presentation lock, stock and barrel.

We’re not sure why they buy it—after all, GAAP earnings surely exist for a pretty good reason, as investors discovered a decade ago when the tech bubble collapsed—but they do.

Thus we have the strange contrast of Mr. Thompson being ridiculed and then run out of town for a modest (and still unexplained) bit of resume inflation, while just down 101 from Yahoo the folks at HP prepare to report yet another quarter of “non-GAAP” earnings, even though HP’s non-GAAP earnings appear to have less relationship to their GAAP earnings than Mr. Thompson’s “non-GAAP” resume had with the “GAAP” version that Dan Loeb’s detectives uncovered.

The HP folks ought to hope Dan doesn't get his detectives to start asking questions about that...

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

The content contained in this blog represents only the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. And if you think Mr. Matthews is kidding about that, he is not. The content herein is intended solely for the entertainment of the reader, and the author.

Thursday, May 10, 2012

This year we’re utilizing a shorter, snappier way to summarize the Berkshire Hathaway annual meeting as a way to spare readers the redundancies in Buffett and Munger’s question-and-answer session.

After all, the commentary overlap with past meetings is probably 75% nowadays—we’ve even developed a sort of Berkshire shorthand for our note-taking, writing simply “Graham story” when Buffett launches into his dissertation on the importance of certain chapters in Ben Graham’s “The Intelligent Investor,” for example; “MBA joke” whenever Buffett or Munger make fun of the meaningless (and dangerous) risk-evaluating models of the academic world; and “IBK joke” when they go after investment bankers, another favorite target.

Nevertheless, the meeting was, as always, interesting.

For one thing, attendance was down, noticeably, even if Buffett wouldn’t say so—probably a side-effect of his high, and highly controversial, political profile these days. Also, there was the added (and, we thought, welcome) presence of insurance analysts asking questions for the first time since the very old days when a few professionals would show up at the Berkshire cafeteria and fire away.

Overall, there was a detectable “thrill is gone” sense hanging over the weekend. Buffett himself did not show up at some of the side-parties that many of his most loyal shareholders routinely schedule, as he did in the past, and even the press complained about the tight restrictions on their cameras.

But Charlie Munger, pushing 90, was in great form, and Bono was spotted in the crowd, a step up from last year when George Lucas made it.

So there.

—JM, May 2012

Berkshire Hathaway 2012

Biggest Change: Tighter security and more of Buffett The Analyst than Buffett The New-Age Spiritual Guru. Gone, unfortunately, was Buffett’s pre-meeting stroll to a seat in the middle of the floor of the arena to watch the kick-off movie (instead he was kept inside the Board of Director’s gated pen, up front near the stage, where beefy guards with earpieces and zero smiles stood watch).

Gone, fortunately, were questions like “What should I do with my life?” and “Do you believe in Jesus Christ and do you have a personal relationship with God?” (That was actually asked—and answered by Buffett—a few years ago: you can read the answer in our book.)

Best Change: Three insurance analysts asking geeky business questions about Berkshire’s operations—the first time in years Buffett has been questioned in depth about the guts of Berkshire Hathaway.

And while there was grumbling from the sightseeing-types in the crowd about the technical discussion (as well as from ace financial analyst/money manager John Hempton, who thought it was not technical enough and wrote about it here, although I knew what John thought before he wrote that because I sat with him), the fact is Buffett has gotten away with very few hard questions about Berkshire’s operations in the years since he became a CNBC staple.

Expect fewer attendees next year, and the year after, and the year after…but better questions.

Most Fun: Getting to see and hear Warren Buffett discuss the insurance businesses in detail thanks to those geeky questions. He didn’t create the track record of a lifetime by luck.

Least Fun: Two rants, both by people from Boston (where else?)—one about the Liberty Mutual scandal and the other about Fannie Mae/Freddie Mac, both of which Buffett and Munger handled far more patiently than the crowd.

Also, way too many questions about Berkshire’s lagging stock price (it’s a conglomerate with a bunch of low P/E business for gosh sakes, not a closet mutual fund run by Warren Buffett any more.) Speaking of which...

Most Delicious Moment: Charlie Munger blowing off a well-known hedge fund manager who used the microphone to talk up Berkshire’s stock before lobbing a softball, “what-am-I-missing” type of question about the lagging stock price.

Rather than respond in Typical Public Company CEO Fashion about how Berkshire was “executing its strategic objectives” or complaining the stock was “not reflecting the underlying values of the business” or reassuring us that management would “pursue all means to enhance shareholder value,” as most CEOs would do, Munger simply said: “I wouldn’t worry too much. I think you aren’t really welcome in this room if that sort of short-term orientation turns you on.”

And that ended the discussion about Berkshire’s stock price.

Least Appreciated Line: “If you make your buy and sell decisions based on what a business is worth, you’ll make money.”—Warren Buffett.

Most Appreciated Line: (In response to a question about succession at Berkshire after Buffett’s death.) “The good fortune is not going to go away just because Warren happens to die. It won’t help him, but...”—Charlie Munger.

Weirdest Moment in the Opening Movie: The cartoon, in which the University of Nebraska football team (Buffett’s favorite) plays a University of Washington team made up of robots coached by failed/disgraced presidential candidate Herman Cain. (I am not making this up.)

Worse, during his half-time pep-talk, Coach Cain made a bunch of 9-9-9 jokes and then urged his men to hit hard, yelling “Take that, sucka!” like a, well, like a stereotypical African-American.

Who thought that would be funny?

Best Comment on the Opening Movie: “Are they that corny every year?”—John Hempton.

Oh Puh-leeze Moment: When Warren Buffett defended “the Buffett Rule” with talk of “shared sacrifice” and the curious claim that his rule applied only to “a very few” people, meaning those with “the 400 largest incomes in the U.S.” which of course is no longer the case, as everyone in the place knew.

You-Could-Hear-A-Pin-Drop Moment: When Buffett casually said Todd Combs and Ted Weschler, the recently hired money managers at Berkshire, are being paid “one million dollars a year,” plus incentive fees. Buffet’s no fan of “shared sacrifice” when it comes to incentivizing his own moneymakers…

A Lesson For Every Money Manager Department: Buffett’s revelation that in all of his and Munger’s years of managing Berkshire together (47 and counting), “We’ve never talked about macro stuff.”

Most Surprising Applause Line: Becky Quick’s question on behalf of a man who first noted that his 84 year old father wouldn’t buy Berkshire stock because of Buffett’s constant yapping about a Buffett tax, and then asked what impact Buffett’s high profile might be having on the stock price. (This got spontaneous, fairly loud applause despite the Buffett-friendly crowd.)

Least Surprising Applause Line: Buffett’s response to the young man, which was “I don’t think anyone should have their citizenship restricted” simply because they run a public company, plus this zinger about the young man’s 84 year old father: “Maybe he oughta own Fox.” (This got louder applause than the question, naturally.)

Feel-Good Question, Literally and Figuratively: From Andrew Ross Sorkin, on behalf of “many” in the crowd who had urged him via email to ask, “Warren, how’re you feeling?”

Best Munger Retort: (To Sorkin after Buffett said “I feel great.”) “I’m jealous. I probably have more prostate cancer than he does.”

Least Interesting Question: About gold. ‘Nuf said.

Most Interesting Question: “How do the large sovereign debts get balanced, and do they concern you?” Buffett’s answer was, “I don’t know how it plays out in Europe…I would totally avoid buying medium or long term government bonds.” Munger added, “He’s asking the really intelligent question of the day and we’re having a hard time answering it.”

For the record, this “really intelligent question” actually drew applause from the crowd when it was asked, which tells you what’s on people’s minds regardless of which party they’re voting for in November.

Also, for the record, the fellow who asked it was from Boston, which just goes to show not everyone in that Commonwealth is certifiable.

The Oracle spent a good five minutes explaining how the paper “still tells me some things I can’t find out about elsewhere,” such as—and I am not making this up—the obituaries and the wedding notices. Nobody was buying it.

Most Convincing Answer: Buffett and Munger, when asked by one of those geeky insurance analysts whether Berkshire would ever be subject to the Investment Company Act of 1940.

Buffett said he’s read the Act “20 times” (and when Buffett says he’s read something 20 times, he’s not kidding), and “I see no way Berkshire comes close to that.” Munger said flatly, “We are NOT just an investment company.”

Something Every Investor Should Always Keep in Mind: Asked about why Berkshire keeps such a large cash reserve, Buffett said, “We don’t ever want to go back to ‘Go.’”

Best Answer: Munger, to the same question, “I think it’s terrible for most retailers—not slightly terrible, really terrible.”

Most Concise Answer: Munger, when asked how a business can “build barriers” around itself: “It’s tough. We sort of buy barriers, we don’t build them.”

The Single Most Revealing Comment About What Made Berkshire A Growth Stock And Why It Is No Longer One: “There were times when Ajit [the genius who runs Berkshire’s reinsurance business] would generate billions of float and Warren would generate 20% returns on that float, and that would happen over and over and over…and that was fun.” —Charlie Munger

One More Mungerism Before We Go: “I rejoiced the day I got rid of a stock quoting machine. I like this idea of owning businesses forever.”

And Warren Buffett’s Successor as CEO of Berkshire Hathaway Is Who? The answer is clear. Read all about it in the forthcoming 99c mini-eBook on Amazon.com, “Buffett’s Successor: Who it Will Be, Why it Matters.” To be published by eBooks on Investing this summer.

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

The content contained in this blog represents only the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. And if you think Mr. Matthews is kidding about that, he is not. The content herein is intended solely for the entertainment of the reader, and the author.